In this era of globalisation and economic integration, overseas investments by Indians have been growing rapidly. It is therefore incumbent on the taxpayer that these investments and their underlying incomes are appropriately disclosed in their Indian tax filings, as specified.
Reporting of foreign assets in the Indian income-tax returns was made mandatory effective Financial Year (FY) 2011-12 . A person who qualifies as a Resident and Ordinarily Resident (ROR) in India in any FY and holds specified foreign assets, must file a tax return in India to report these assets, irrespective of whether or not she/he has taxable income in India during the relevant FY. The reporting requirement does not apply to those resident individuals who qualify as Not Ordinarily Resident (NOR) or Non-Resident in India.
Individuals holding foreign assets are required to report these assets in Schedule FA and Schedule AL (if applicable) of their tax return using ITR-2 or ITR-3 as relevant. It is not only important to report all the foreign assets but equally important to make proper disclosure of income earned from such foreign assets in tax return. Over the last decade, lot of changes have been made to the schedule to widen its coverage.
Following are few of the important points one needs to be mindful of while filling the details of the foreign assets in ITR form:
What to report: FA schedule requires various details (such as peak/opening/closing balances, date/cost of investment, etc.) with respect to the foreign assets viz. foreign depository accounts, foreign custodian accounts, foreign equity and debt interest, foreign cash value insurance contract or annuity contract, financial interest in any entity outside India, any immovable property outside India, any other capital assets outside India, any overseas account in which there is a signing authority. Trusts created outside India in which one is a trustee/beneficiary/settlor and a residuary section for any other income derived from any foreign source.
The schedule is wide enough to cover assets held as legal owner, beneficial owner and beneficiary and both direct/indirect funding and interests. Hence all assets where the individual is a legal owner or where an individual has directly/indirectly funded an asset held for the immediate/future benefit of self/ any other person or where the individual derives an immediate/ future benefit from an asset which has been funded by another person come under the purview. It is therefore imperative that disclosure requirement with respect to assets where one is the legal owner (even if not funded by self), joint assets, holdings for benefit of spouse/any other person, holdings in foreign trusts, partnerships etc. is carefully analysed.
• When to report: Assets held at any time during the Indian FY as also the relevant accounting period of the foreign country, are required to be reported. Accounting period may vary basis the period adopted by the relevant foreign country for closing their accounts and tax filings i.e. i) 1st January to 31st December where calendar year is adopted or ii) 1st April to 31st March where FY is adopted or iii) That period of 12 months, which ends on any day succeeding 1st April, 2020 (applicable for FY 2020-21), where a different period of 12 months is adopted (for e.g. U.K., Australia etc.).
• FOREX conversion: Exchange rate for conversion of the peak balance or value of investment or the amount of foreign sourced income in INR shall be the rate adopted by State Bank of India ‘telegraphic transfer buying rate’ of the foreign currency as on the date of peak balance in the account or on the date of investment or the closing date of the accounting period as relevant or any other date for reporting of income as prescribed.
• Reporting in Schedule AL: Foreign assets reported in the Schedule FA are still required to be reported in the Asset-Liability schedule (i.e. Schedule AL, if applicable) in the manner specified, if such foreign assets are held as on 31st March of the relevant FY (at the end of the Financial Year).
• Exception to Foreign Assets reporting by ROR: Any foreign national, working on an employment visa, business visa or on student visa in India may choose not to report foreign assets, if the below two conditions are satisfied:
Foreign asset was acquired while such individual was a Non-Resident in India; and
No income is earned during the Financial Year from such Foreign asset.
• Consequences of Non-Compliance with FA reporting/disclosure: Any misreporting/underreporting of income and assets in India tax filings, may result into penal consequences and, in fit cases, prosecution proceedings may also be launched under The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) and Income Tax Act, 1961.
With increased focus on robust tax compliance and reporting, leveraging of technology, data analytics and information exchange agreements there is enough and more information already available with the tax department on overseas income/assets of resident individuals. Hence, to avoid any unwarranted consequences, the taxpayer must furnish accurate details in the tax return.
The author, Parizad Sirwalla, is Partner and Head at Global Mobility Services - Tax, KPMG in India. The views expressed are personal